Questions from an Awestruck Reader

Melanie writes:   
“Hi! I discovered your blog thru a comment you left on another blog. I have been crunching numbers and reading for the past day. I love your concept of never exceeding the 10% tax bracket! I had never heard of that. I do have a question though. I know you have been at this for years. But if I am not at a point where I would want to withdraw from my IRA/tax-deferred savings, would you still suggest doing it the way you have outlined here? I notice you said that your family didn’t start the 72(t) withdrawals until this year. I wanted to know what your strategy was up to this point to maximize savings and minimize taxes. My thought was to contribute enough so that my income doesn’t exceed the $52k $42K*. (I use that number because my family structure is like yours, married filing jointly + 1 child.) Any input would be appreciated. I am in awe! “ 
    My response: 
     Thanks for the questions and the kind words.  I have to agree with you in that Free Money + 10% bracket approach is mind-blowing in its simplicity and effectiveness.  Here are my comments regarding your questions: 
     Back before we had enough IRA money to generate significant 72t distributions, my wife and I had a different income goal.  Instead of using the Free Money + 10% bracket approach, we judged our personal finance efficiency on whether or not we qualified for the Saver’s Credit.  If we did, HURRAH…if not, BOO HISS!  Our methods to reduce our income and save on taxes was pretty basic…cram as much money as possible into our 403b and 457 accounts.  Then, before April 15th of the next year, we’d top off our IRA’s to further reduce our taxable income.  Our goal was to qualify for the Saver’s credit, usually at the lowest credit allowed.  The last year I qualified for it was in 2009; the amount was usually from $50K to $55k depending on the year.  Since my wife and I both qualified for the credit, we earned a $400 credit that further reduced our federal income tax obligation.   
“Tricks” to Maximize Retirement Account Contributions
     One way we always pumped up our retirement savings was to put 100% of our January and February paychecks into our 403b accounts.  The ladies at payroll always knew that in January we would come by to change our contribution level to 100%.  (Actually, we would get paychecks for 2 cents because they had to send some money to our checking account.)  It was always good to know that on March 1st that we had put away about $20,000 in two months.  In retrospect, we should have funded our 457 accounts first because they can be used as “current accounts” or “emergency funds” upon separation of service from the employer.  In other words, a 457 account can be tapped easily once  you leave the job.  Had we funded our 457 accounts first, we would be taking withdrawals directly from our 457 account instead of using the 72T provision to get to our IRA savings (IRA savings = IRA contributions and 403b rollovers). 
     Another way we maximized our retirement savings was to tap our home equity line of credit.  These funds were usually used in April to “top off” our IRA savings.  If  you check out my net worth pic below, you can see that I have not done a great job managing the HELOC (other mortgage), so think hard before you follow this advice.  The HELOC allowed us to fully fund accounts prior to the April 15th deadline, but it needs to be treated similar to a credit card because the balance can mushroom out of control.  All of that said, I am not too worried about it because our borrowing rate is at 2.89%.  (I know…this cannot go on forever, and it won’t.)    
     Over the last four years I have also come to view frugal living as a way to dramatically boost retirement savings.  Prior to our move to Echols County, we were much more focused on our savings than our spending.  While we were not spendthrifts, we did not focus on cutting ongoing costs.  For example, we had a ridiculous cable-internet-phone package and we ate out far too much.  These days we don’t have cable TV, and I do most of the cooking.  The funny thing is that no one in the family feels like we’re missing anything by forgoing cable and restaurant meals.  Both my wife and I are good cooks, and we have more entertainment options than we can consume.  These cost cutting measures not only saved us money but they have also enhanced our quality of living.  Like most people, my wife and I always thought that “frugal living” meant deprivation, misery and struggle…nope!      
     As it stands now, your Free Money + 10% is $41,750 while the maximum that you can earn and still qualify for the Saver’s Credit is $59,000.  So, if you can’t come in under the $41,750 amount, you can at least shoot for the $59,000 amount.  Either way you will be making informed tax planning decisions, and that will put you light years ahead of most people.  Be aware that distributions from retirement funds disqualify individuals from the Saver’s Credit.  Since you will not be taking any retirement plan distributions, you should be able to qualify for the credit.  I hope this helps you with your tax planning.    
Disclaimer to All Readers:  Please check with an accountant or tax guru to make sure your tax plan will work for YOU.  I am not a tax expert.  Actually, I am an unemployed, middle-aged man who often blogs in his underwear.   
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One Comment

  1. Thanks so much for responding to my questions with a post! Yes, this is very helpful. We are not in the education field, but I was able to max out 401k, HSA, and IRA contributions. I can see the need to perhaps speak with an accountant to be sure of the tax implications. I will say we are on the cusp of being debt free after following the Dave Ramsey plan. In year since reading him, I discovered many other blogs about frugality and saving. I think they have probably had more impact on my financial thinking than anything else. I am happy to have found this information at this time, when we are already living happily and frugally. Now we can continue and improve upon it, and save heavily from here going forward. Looking forward to your future posts! Keep up the good work.

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